Have Student Loans? Understand Your APR

06/12/2015 10:39 am ET | Updated Jun 11, 2016

As an independent, transparent marketplace for student loans, Credible helps borrowers understand all of their student loan options

If you have graduated from college and have thought about consolidating or refinancing your student loans, you may be wondering what possible interest rate you can get. If you are still in school and need a private student loan, you may find yourself in the same situation. Each lender has a certain way rates are presented and some charge origination and application fees, which are usually not reflected in the interest rate range, making it difficult to compare across lenders. What borrowers should really be paying attention to is the annual percentage rate (APR) of the loan in order to make a more educated decision.

What Does APR Stand For?

An APR, annual percentage rate, is a complete representation of what it costs to borrow a loan. It factors in other loan fees aside from the interest rate to help borrowers truly compare the price of loans. The APR is almost always higher than the interest rate. Government regulators require lenders to disclose the APR to borrowers so they can more accurately compare loans to one another.

How is it Calculated?

An APR is calculated so that borrowers can compare the true cost of a loan once fees are added into the loan. In addition to the interest rate, an APR also calculates fees such as origination, application, and supplemental fees. These fees can be as high as 2% of the total loan balance. Some of the fees that are not included in a student loan APR are penalty charges such as late payment fees.

Why Does it Matter?

When shopping for private student loans or refinancing offers, many borrowers compare loans based on the interest rate alone. However, the lowest interest rate is not always the best deal. Borrowers should focus on the APR because it gives a representation of the true cost of the loan unlike the interest rate. It is possible for one loan to have a lower interest rate, but a higher APR due to costly fees that are added to the loan.

Some Things to Remember:

Although using APR is a more effective way to compare loans than just looking at the interest rate there are a few caveats. First, some lenders deduct an origination fee from the initial loan disbursement to keep it out of the APR. Make sure you understand all costs associated with the offers you are seeking out to help avoid overpaying.

Ultimately, when trying to find the best student loan for yourself you will need to ask some questions in addition to looking at your APR. No two loans are created the same, and although they may have the same interest rate, one may be more costly than the other. Ask your lenders questions about what fees have been included in your APR and any other fees that may be charged on your loan. This will allow you to get the most accurate picture of the loan best-fitting your personal situation.

If you are interested in exploring your refinancing or private student loan options, visit Credible